In the case of MERSCORP Holdings, Inc. v. Malloy, 320 Conn 26 (Feb. 23, 2016), the Connecticut Supreme Court has upheld the validity of a statute that tripled the recording fees for any entity referring to itself as a “nominee.” The Connecticut State Legislature amended Connecticut General Statute § 7-34a(a)(2) and § 49-10(h) in 2013 to increase the cost of recording documents related to a mortgage by the nominee of that mortgage. For a release of mortgage or assignment of mortgage, the recording costs increased from $53 to $159 for the first page; the cost for each additional page has not changed and remains at $5. Similarly, the recording of a mortgage increased from $53 for the first page to $159, with the cost for each additional page still $5.

The legislation also altered the allocation of the recording fees. In Connecticut, land records are kept on a town-by-town basis and are maintained by the town clerks of each town. For example: prior to 2013, out of the $53 fee for recording the first page of a mortgage, the state received $38, the town received $3, and the town clerk received $12. After July 2013, from the $159 paid to record the first page of a MERS mortgage, the state receives $110, the town receives $39, and the town clerk retains $10. Allocations are similarly adjusted for the increased recording fees imposed on MERS assignments and releases. The recording fees for all other filers not identified as a “nominee of a mortgagee” were unchanged by the legislation.

The parties agreed that Mortgage Electronic Registration Systems, Inc. (MERS) is presently the only entity that qualifies as the nominee of a mortgage and that the legislature passed the bill with MERS in mind. Accordingly, MERS and MERSCORP Holdings, Inc. are the only two entities required to pay the increased fees. The parties also agreed that the purpose of the legislation, at least partially, was a revenue enhancing measure to help balance the state budget.

The Lawsuit — MERS had initially filed the lawsuit on July 2, 2013 against representatives of the state, seeking, inter alia, that the court declare the referenced statutes as unconstitutional under the equal protection clause of both the federal and state constitutions as well as the dormant commerce clause of the U.S. Constitution. After hearing argument on the parties’ cross-motions for summary judgment, the trial court granted summary judgment in favor of the defendants, upholding the constitutionality of the statutes. The plaintiffs appealed to the Appellate Court; the Supreme Court transferred the case to its own docket sua sponte (i.e., on its own motion).

Following argument and consideration of the many amicus briefs — including those filed by the American Land Title Association, the Connecticut Bankers Association, the Connecticut Mortgage Bankers Association, and the Connecticut Fair Housing Center — the Supreme Court affirmed the judgment of the trial court and upheld the constitutionality of the increased recording fees.

In upholding the trial court’s ruling, the Supreme Court considered these recording fees a hybrid of taxes and user fees because the fees are used to both compensate the town clerks for the service of recording and maintaining the documents, as well as to generate revenue for the state and the municipalities.
Equal Protection Analysis — In deciding whether the increased recording fees violate the equal protection provisions of the federal and state constitutions, the Court held that the statute did not affect a fundamental right or suspect class and therefore (so long as the increased fee was rationally related to some government purpose) assessing nominees such as MERS a higher recording fee would not infringe equal protection. Further, the Court opined that the primary purpose of the tax or fee was to raise more money to help balance the state budget. The Supreme Court proceeded to hold that the increased fee was rationally related to this legitimate purpose of raising revenues. It found “at least” two conceivable bases on which the legislature might have reasonably imposed higher recording fees on nominees such as MERS.

First, it found that the legislature may have concluded that MERS was better able to shoulder the recording costs (although it later stated in its dormant commerce clause analysis that most of the increased costs were borne by homeowners). Second, it reasoned that the legislature may have determined that the MERS system reduces the number of assignments recorded over the life of a mortgage loan and, therefore, the initial recording fee for a mortgage in favor of MERS as nominee — as well as the final fee paid for a release or an assignment out of the MERS system — compensate for the lost recording fees that would have been due without the MERS system.

Dormant Commerce Clause — With respect to this clause of the U.S. Constitution, the criteria that the Court considered in determining the constitutionality question was whether the law was facially discriminatory against interstate commerce; and, secondly, even if it were found to be facially neutral, whether the law’s practical effect was to impose an undue burden on interstate commerce.

The Court determined that the law was not facially discriminatory. It found that the law on its face did not favor Connecticut-based financial companies when, in fact, most of the recording fees would likely be paid by Connecticut residents in mortgage closings, and not by out-of-state banks or mortgage servicers who will receive the benefits of the MERS recordings because assignments of mortgages will not be required. In addition, the Court found that there was no existing Connecticut-based nominee database system, or one likely to be created, to compete with the MERS system due to the national nature of the secondary mortgage market. Also, the Court found the intention of the statute was not to impose the increased fees on only a mortgage transaction with a national character, but solely on nominees that utilized MERS or any other virtual recording system implemented to facilitate the transfer of loans on the secondary market. Furthermore, the Court found that MERS was not substantially similar to other companies because of the manner in which it used the public land records, which gave MERS greater benefits.

Lastly, the court found that the statute and the increased recording fees on MERS documents did not impose an undue burden on interstate commerce. This holding was based, in part, on the fact that the increased fees were not found to have adversely impacted the MERS business model or the secondary market in general in Connecticut.

Conclusion — Absent a successful petition for certiorari to the U.S. Supreme Court, which must be filed on or before May 23, 2016, it would appear as though the increased recording fees for MERS-related documents are the law in Connecticut. The increased recording fees seem to have been successfully implemented by the adoption of a statute by the state legislature — as an alternative to previously unsuccessful lawsuits against MERS, by deed recording offices in other states, for loss of recording revenues occurring as a result of the utilization of the MERS system.